From Boom to Bust

Ethiopian Banks Brace for New Era of Monetary Policy, Competition

Many Ethiopian banks have enjoyed profit bonanzas for years due to very expansionary monetary policy, which increased the demand for cheap credit loans and advances. However, this has carried negative real lending rates for over a decade. Furthermore, they have been operating in a protected and relatively predictable environment, giving them the easy means to grow and expand.

Now, the banking industry has faced uncertainty stemming from a five-year Treasury bond purchase requirement, a tight credit ceiling, declining deposits, rising costs of expansion, stiff competition within and from telecom operators, the commencement of securities exchange, the possible entry of foreign banks, the policy dilemma arising from the unsettled deal with the IMF, and significant reform of the monetary policy and regulatory regimes.

As part of contractionary monetary policy, the credit ceiling imposed on the banking industry in August last year placed considerable pressure on the banks. Although the credit ceiling helps reduce inflation, it has several negative repercussions. The restriction has led to a scarcity of credits, which has increased lending rates, as observed with several banks. Furthermore, the measure would encourage credit rationing and reduce competition. The significant credit beneficiaries rationing are the more prominent and established borrowers with large collateral capacity and strong business relations with the banks. This means that smaller businesses will find borrowing very hard, and banks will also use stricter lending requirements and prioritize customers based on existing operational relations.

The pressure on the smaller banks, which still need an adequate loan portfolio to earn a decent interest income, is immense. Considering the losses the newcomers potentially suffer upon starting new ventures, more precisely in recent years, the tight monetary situation will bring obvious-expanding expenditures. In the face of restrictive monetary policy, this could sustain their losses. This will consume their equities and make raising fresh capital an uphill journey.

Although the financial sector is sound and stable based on several indicators, such as capital adequacy, non-performing loans, liquidity, and profitability, the credit concentration of the banking industry rings an alarm bell across the economy. According to the National Bank of Ethiopia (NBE), the Financial Stability Report released recently indicates that the largest ten borrowers held 23.5 per cent of total loans and advances of the banking industry at the end of June 2023. This implies that any financial problem for these borrowers could have a significant negative impact on the industry.

The concentration of credit in the banking industry stems from its structure. Not only does the state-owned CBE have a significant presence, but it has also granted substantial amounts of credit to a handful of state-owned entities whose financial viability is uncertain. What makes the matter complicated is the CBE’s sheer size, preferential treatment, and regulatory forbearance toward it.

Although the market share of the CBE has declined in recent years due to the growing presence of private banks and the slowing down of its aggressive lending, it is still a significant player in the industry, having almost half of the total financial market size. According to the Financial Stability Report, the total assets of the CBE accounted for nearly half of the industry’s total assets. Such too-big-to-fail banks pose systematic severe risks to the industry. Any trouble to the CBE would severely spill over the industry.

The banking industry’s credit concentration should primarily concern the NBE, which must ensure a diversified credit portfolio. The rules regarding single borrowers should be strictly applied to the CBE, which has been lending enormous loans to strategic state-owned enterprises, relying on Government guarantees.

With an increasing number of banks joining the industry, competition for customers, employees, and suitable locations has become fierce. This has made banking expansion a costly endeavour. Notably, smaller banks have found branch expansion very difficult. Without operational expansion, earning a decent return would be a pipedream for them.

The increased uncertainty arising from the unsettled deal with the IMF should be very concerning to the banking industry. Notably, the foreign exchange adjustment and the foreign exchange regime, which the IMF is aggressively pushing, should be a serious concern to the banks. For instance, a substantial devaluation of the Ethiopian currency could cause a massive loss to the banks, which have a vast exposure to net foreign currency liabilities and commitments. This means the banks should always be vigilant of the developments with the IMF and develop a hedging strategy against any losses arising from the devaluation of the Birr.

The other most important recent development is the NBE three-year strategic plan, covering 2023-2026. In the strategic plan released in December 2023, the NBE envisaged transitioning to a price-based monetary policy framework from its current quantity-based framework and reforming the regulatory and supervisory regime. This transition will have severe implications for the banking industry.

The new framework will require the NBE to rely on market mechanisms for monetary policy, which means several new monetary policy instruments will be used. Moreover, the NBE will employ monetary policy communication as a vital tool. Thus, the banks should understand this framework and be ready to proceed with the transition. In particular, they should equip themselves with liquidity management skills.

Liquidity management is the lifeblood of a bank’s financial stability. Banks constantly juggle incoming deposits and outgoing payments. They need enough readily available cash (liquidity) to meet every day needs like withdrawals, loan repayments, and settlements. A shortfall can lead to missed payments, damaged reputation, and even collapse.

Depositors trust banks to have their money available whenever they need it. If a bank struggles with liquidity, depositors may panic and withdraw funds en masse, creating a bank run. This can quickly spiral out of control, destabilizing the entire financial system. This has become a growing trend in Ethiopia because banks usually run out of cash, let alone withdrawal or transfer, unless they own bank accounts. This has become downing, frustrating depositors so much.

Economic conditions and depositor behaviour can be unpredictable. Effective liquidity management allows banks to prepare for unexpected situations. They can maintain a cash or readily convertible asset buffer to handle sudden surges in withdrawals or disruptions in funding sources.

While holding excess cash ensures liquidity, it also means less money available for loans and investments, which generate profit. Sound liquidity management involves balancing having enough cash and using funds profitably.

To achieve stable liquidity management, they may rely on each other for short-term loans to manage their liquidity. If one bank experiences a shortfall, its inability to repay can create a domino effect, impacting other banks and disrupting the entire interbank lending system.

In short, effective liquidity management allows banks to function smoothly, maintain depositor confidence, and navigate financial challenges. It’s a cornerstone of a stable and healthy financial system. However, several factors need improvement, including eroding depositor confidence. The banks themselves and NBE should take this seriously to improve the financial health of the entire sector.


Many Ethiopian banks have enjoyed profit bonanzas for years due to very expansionary monetary policy, which increased the demand for cheap credit loans and advances. However, this has carried negative real lending rates for over a decade. Furthermore, they have been operating in a protected and relatively predictable environment, giving them the easy means to grow and expand.

Now, the banking industry has faced uncertainty stemming from a five-year Treasury bond purchase requirement, a tight credit ceiling, declining deposits, rising costs of expansion, stiff competition within and from telecom operators, the commencement of securities exchange, the possible entry of foreign banks, the policy dilemma arising from the unsettled deal with the IMF, and significant reform of the monetary policy and regulatory regimes.

As part of contractionary monetary policy, the credit ceiling imposed on the banking industry in August last year placed considerable pressure on the banks. Although the credit ceiling helps reduce inflation, it has several negative repercussions. The restriction has led to a scarcity of credits, which has increased lending rates, as observed with several banks. Furthermore, the measure would encourage credit rationing and reduce competition. The significant credit beneficiaries rationing are the more prominent and established borrowers with large collateral capacity and strong business relations with the banks. This means that smaller businesses will find borrowing very hard, and banks will also use stricter lending requirements and prioritize customers based on existing operational relations.

The pressure on the smaller banks, which still need an adequate loan portfolio to earn a decent interest income, is immense. Considering the losses the newcomers potentially suffer upon starting new ventures, more precisely in recent years, the tight monetary situation will bring obvious-expanding expenditures. In the face of restrictive monetary policy, this could sustain their losses. This will consume their equities and make raising fresh capital an uphill journey.

Although the financial sector is sound and stable based on several indicators, such as capital adequacy, non-performing loans, liquidity, and profitability, the credit concentration of the banking industry rings an alarm bell across the economy.

According to the National Bank of Ethiopia (NBE), the Financial Stability Report released recently indicates that the largest ten borrowers held 23.5 per cent of total loans and advances of the banking industry at the end of June 2023. This implies that any financial problem for these borrowers could have a significant negative impact on the industry.

The concentration of credit in the banking industry stems from its structure. Not only does the state-owned CBE have a significant presence, but it has also granted substantial amounts of credit to a handful of state-owned entities whose financial viability is uncertain. What makes the matter complicated is the CBE’s sheer size, preferential treatment, and regulatory forbearance toward it.

Although the market share of the CBE has declined in recent years due to the growing presence of private banks and the slowing down of its aggressive lending, it is still a significant player in the industry, having almost half of the total financial market size. According to the Financial Stability Report, the total assets of the CBE accounted for nearly half of the industry’s total assets. Such too-big-to-fail banks pose systematic severe risks to the industry. Any trouble to the CBE would severely spill over the industry.

The banking industry’s credit concentration should primarily concern the NBE, which must ensure a diversified credit portfolio. The rules regarding single borrowers should be strictly applied to the CBE, which has been lending enormous loans to strategic state-owned enterprises, relying on Government guarantees.

With an increasing number of banks joining the industry, competition for customers, employees, and suitable locations has become fierce. This has made banking expansion a costly endeavour. Notably, smaller banks have found branch expansion very difficult. Without operational expansion, earning a decent return would be a pipedream for them.

The increased uncertainty arising from the unsettled deal with the IMF should be very concerning to the banking industry. Notably, the foreign exchange adjustment and the foreign exchange regime, which the IMF is aggressively pushing, should be a serious concern to the banks. For instance, a substantial devaluation of the Ethiopian currency could cause a massive loss to the banks, which have a vast exposure to net foreign currency liabilities and commitments. This means the banks should always be vigilant of the developments with the IMF and develop a hedging strategy against any losses arising from the devaluation of the Birr.

The other most important recent development is the NBE three-year strategic plan, covering 2023-2026. In the strategic plan released in December 2023, the NBE envisaged transitioning to a price-based monetary policy framework from its current quantity-based framework and reforming the regulatory and supervisory regime. This transition will have severe implications for the banking industry.

The new framework will require the NBE to rely on market mechanisms for monetary policy, which means several new monetary policy instruments will be used. Moreover, the NBE will employ monetary policy communication as a vital tool. Thus, the banks should understand this framework and be ready to proceed with the transition. In particular, they should equip themselves with liquidity management skills.
Liquidity management is the lifeblood of a bank’s financial stability. Banks constantly juggle incoming deposits and outgoing payments. They need enough readily available cash (liquidity) to meet every day needs like withdrawals, loan repayments, and settlements. A shortfall can lead to missed payments, damaged reputation, and even collapse.

Depositors trust banks to have their money available whenever they need it. If a bank struggles with liquidity, depositors may panic and withdraw funds en masse, creating a bank run. This can quickly spiral out of control, destabilizing the entire financial system. This has become a growing trend in Ethiopia because banks usually run out of cash, let alone withdrawal or transfer, unless they own bank accounts. This has become downing, frustrating depositors so much.

Economic conditions and depositor behaviour can be unpredictable. Effective liquidity management allows banks to prepare for unexpected situations. They can maintain a cash or readily convertible asset buffer to handle sudden surges in withdrawals or disruptions in funding sources.

While holding excess cash ensures liquidity, it also means less money available for loans and investments, which generate profit. Sound liquidity management involves balancing having enough cash and using funds profitably.

To achieve stable liquidity management, they may rely on each other for short-term loans to manage their liquidity. If one bank experiences a shortfall, its inability to repay can create a domino effect, impacting other banks and disrupting the entire interbank lending system.

In short, effective liquidity management allows banks to function smoothly, maintain depositor confidence, and navigate financial challenges. It’s a cornerstone of a stable and healthy financial system. However, several factors need improvement, including eroding depositor confidence. The banks themselves and NBE should take this seriously to improve the financial health of the entire sector.


12th Year • May 2024 • No. 129

Abdulmenan Mohammed Hamza (PhD)

is a London based financial expert. He can be reached at abham2010@yahoo.co.uk


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